Over the last two decades, the "growing political salience of religion" in international relations has prompted policymakers and scholars to call for greater religious literacy in diplomatic practice; yet, the question remains whether current institutional frameworks are capable of interpreting religious phenomena beyond simplified sociological, cultural or juridical categories. In this context, the European Union's engagement with Freedom of Religion or Belief (FoRB) provides a useful lens for assessing the limits and the social costs of religious illiteracy within contemporary diplomacy. Building on interdisciplinary scholarship in history, law and international relations, religious illiteracy is understood not simply as a lack of knowledge about religions and their doctrines, but as a historically embedded epistemic condition reflected in administrative and legal arrangements that shape how institutions recognise and interpret religious actors and claims. Within the EU, engagement with religions has expanded significantly through a range of instruments. However, this expansion has not been accompanied by a comparable development of institutional interpretive capacity. This mismatch constitutes a competence-capacity gap: while EU institutions have acquired formal competences and political commitments in the field of religious diplomacy, they often lack the analytical tools necessary to grasp the historical, doctrinal and organisational complexity of religions and religious actors. Through three empirical examples - EU multilateral diplomacy at the United Nations; tensions between EU external advocacy and internal arrangements; and the institutional experience of the first EU Special Envoy for FoRB - this paper analyses how limited institutional interpretive capacities shape diplomatic practice and examines the implications of this gap for EU religious diplomacy.